KUALA LUMPUR (June 27): The government's plans to increase subsidies to cover the cost of living are a positive and could improve market sentiment in the short term as this will help maintain consumers' purchasing power and reduce operational cost pressures on Malaysian companies in the second half of 2022 (2H22).

Coupled with the return of foreign labour, this could boost Malaysian manufacturing competitiveness in the export market and point to an early general election in Malaysia in 2H22, CGS-CIMB said in a strategy note on Monday (June 27).

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz announced on Saturday that the projected consumption subsidy expenditure is RM77.3 billion in 2022, the highest ever borne by any government, versus RM17.4 billion estimated in Budget 2022. 

The projected consumption subsidy covers petrol, diesel and liquefied petroleum gas (RM37.3 billion), cooking oil (RM4 billion), flour and electricity (RM9.7 billion), social welfare assistance (RM11.7 billion) and other subsidies (RM14.6 billion). 

According to CGS-CIMB, the significantly higher subsidy spending could pose some risks to the fiscal deficit projection of 6% of gross domestic product in 2022. 

“However, as subsidies are part of operating expenditure, it needs to be financed by either higher revenue collection or a reduction in other expenditure components.

“For revenue, the high commodity prices and robust domestic economic performance will likely result in a higher tax collection than estimated. Meanwhile, to balance the rest of the subsidy spending, other fiscal expenditure components are likely to see a reduction, namely the government’s supplies and services, grants or emoluments,” the research firm explained. 

At the time of writing on Monday, the FBM KLCI had risen 1.56 points or 0.11% to 1,438.26. 

Nonetheless, CGS-CIMB kept its year-end KLCI target of 1,568 points, with its top three picks being Genting Malaysia Bhd (target price [TP]: RM3.40), MR DIY Group (M) Bhd (TP: RM2.40) and RHB Bank Bhd (TP: RM7.70). It has "add" calls for the three stocks.